Credit Card Processing

Your Complete Guide to Credit Card Processing

Read Time: 12 min

Credit card processing is often seen as a necessary evil in business, accounting for a share of 174.2 billion noncash payments in 2018. This influx of card and digital payment methods continues to dominate the market. Consequently, businesses need to adapt to changing consumer habits for payment processing.

For business owners, it’s a tricky industry to understand. Oftentimes, the fees are confusing and the terms complicated. Not to mention, calling your credit card processor for help often leaves you with more questions than answers. If this has been your experience with credit card payment processing in general, you’re not alone. 

Person holding multiple credit and debit cards

In fact, many small business owners admit their confusion about their financial statements for credit card processing. This is a frequent and yet understandable occurrence. After all, your expertise lies in your industry and market, not in credit card processing. Despite this, you should understand the basics if your business is moving away from cash-only processing.

Consumer behavior continues to shift from a cash-dominated society to only 10% of consumers solely relying on cash to make purchases in the US. But before you ask how you can accept credit card payments, it’s essential to understand the ins and outs of credit card processing.

I hope this guide will provide you with some clarity. We’re going to explore the basics: exactly what you need to know about credit card payment processing.

Credit Card Processing Basics

The navigation box on your left lets you skip around if you came to this article with specific questions. But for everyone else, we’ll start with the very basics.

What is Credit Card Processing?

Credit card processing is the process that allows your customers to pay your business via card payments. It’s the series of events that happen when your customer uses their debit or credit card until you receive that money in your business bank account. 

Who are the Parties Involved?

process credit cards

Credit card payment processing a card takes mere seconds, but there are several parties involved in the process.

  1. Your Business (Merchant). The first and most obvious party involved is your business. You offer a product or service to your customers in exchange for their money. In this context, you’re a “merchant.”
  2. Your Customer (The Cardholder). The next party is your customer. They have a credit card or debit card they want to use to make the purchase. In this context, your customer is a “cardholder.”
  3. Your Credit Card Processor (Payment Processor/Credit Card Processing Company). A payment processor or credit card processing company is the party that routes the transactions by facilitating data transferral between you and your customer. They are the party you sign a contract with to set processing fees and agreements.
  4. Your Customer’s Bank (The Card Issuer). Your customer’s credit or debit card links to a bank account. This could be a large bank like Wells Fargo, Bank of America, or a small bank like a credit union. The bank that houses the account is known as the “card issuer” because they issued the credit or debit card to your customer.
  5. Your Bank (The Acquirer). A bank houses your business bank account. Once again, this could either be a large bank like Wells Fargo or a small bank like a credit union. The bank that houses your account is the “acquirer” or “acquiring bank.” An easy way to remember this is to think that it acquires the funds at the end of the transaction.
  6. Your Customer’s Card’s Brand (The Network/Association). The network or association, also known as the card brand, is the brand of your customer’s credit or debit card. Besides being hosted by a bank, Visa, MasterCard, Discover, or American Express sponsor your customer’s card. 

Credit Card Payment Processing: How It Works

Credit card payment processing is more intricate than it seems. To the cashier or customer, it appears the card is either approved or denied: the end. But it is far more complex than meets the eye

Now that we’ve explored who is involved in processing a transaction let’s walk through the process and discuss the roles each party plays. Keywords are in italics so you can scroll back to the definitions again if needed.

7 Steps for General Credit Card Processing for Your Business

payment processing

A Customer is Checking Out

Step 1: The customer initiates a transaction. The customer (the cardholder) swipes/taps/inserts their credit or debit card to pay for a transaction at the business (the merchant) and starts the credit card payment process.

Step 2: The merchant accepts the information. Next, the merchant accepts and collects the cardholder’s payment information in person, online, or over the phone.

Step 3: The information is sent. The merchant either manually or automatically sends the funds directly to the payment processor via the processing equipment (more on equipment later).

Step 4: The information is verified. The network sends the transaction information to the customer’s bank (the issuer). The issuer then verifies the bank’s records match the information provided and the cardholder has enough money in their account to proceed. The processor checks for any signs of fraud and runs a data security scan.

The Processor Gets Involved

Step 5: The processor is notified. The issuer notifies the credit card processor and the processor sends an “approved” message if everything checks out. If the information is incomplete, inaccurate, or the available balance doesn’t cover the purchase, the processor is notified and sends a “declined” message.

This entire process, to this point, takes mere seconds. 

Receiving an approval message only half completes the transaction. It’s enough to let the customer take their purchase out of the store, but the merchant hasn’t been paid yet. The customer sees an authorization (or a pending charge) on their bank statement. This process freezes the funds so they cannot be used.

Step 6: The batch is closed. To get the money out of the customer’s bank account and into the merchant’s, the merchant must automatically or manually close the batch, or group of transactions. A merchant can close batches manually to include any number of transactions, or set them to close automatically in a given time period. Particularly, 24 hours is the common closing cycle for batches.

Step 7: The money moves. Once the merchant has closed the batch, they’ve indicated to the credit card processor that the transactions in the given batch are true, complete, and accurate.

That processor then routes the money over the network between the customer’s bank account (the issuing bank) and the merchant’s (the acquiring bank).

The Cost of Credit Card Processing Services

You know who the parties are and how the steps work in processing a credit card transaction. Now, let’s talk about credit card processing fees.

While you only pay one company each month (your credit card processor) for these services, all the parties mentioned earlier do get paid for their role in the transaction. “Wholesale” fees compromise this compensation. These wholesale fees come out of the fees you pay to your processor each month for their credit card processing services. 

Service Fees

man taking payment

Your monthly bill from your processor has these major categories:

  • Transaction fees. These fees correspond to individual transactions and make up the bulk of your total fees.

These include any type of fixed percentage or flat amount charged on the transaction (including some wholesale and retail fees under this type of charge). Examples include an authorization fee or a fixed percentage markup rate.

  • Recurring fees. These fees aren’t tied to individual transactions. For example, you may see monthly fees for things like PCI compliance, PCI non-compliance, account on file fees, statement fees, batch fees, etc.
  • One-time fees. One-time fees include setup fees, early termination fees, and chargeback or retrieval fees. A specific or unusual event triggers these fees.

Pricing Models

Payment Processors use several different pricing models to collect fees each month. As a result, your pricing structure and the complete cost you pay (anywhere from 2-5% on average) will vary. This depends on your business model, the inherent riskiness of your industry, credit card acceptance method, and more.

  1. Interchange Plus / Percentage Markup (or Cost +). Depending on the type of payment method used, the charge can vary (i.e., loyalty card, CNP, etc.). The interchange-plus pricing structure is the most transparent, which makes it the most confusing. Each party has its own fees for their involvement in the transaction. This pricing structure passes those wholesale fees to you, which can include any number of the 300+ possible interchange rates and dozens of association fees). It adds a small fixed percentage markup over cost that compensates your payment processor.

Flat Rate. This pricing structure is the least transparent but easiest to understand. It bundles all the rates and fees you would pay into one easy-to-understand and predictable flat percentage each month. This is the pricing structure you’ll probably be most familiar with as it is the structure used by Stripe, Square, and PayPal.

  1. Tiered/(E)RR. The tiered pricing structure is similar to the flat rate pricing structure, but instead of one rate, there are a few. Your processor bundles the 300+ possible interchange rates into three ‘buckets’ (typically qualified, mid-qualified, and non-qualified) and charges you based on the transactions that fell into each bucket.
  2. Surcharge. This pricing structure passes the fees imposed from running the transaction to your customer. A surcharge program only applies to transactions that would incur credit card processing fees. Surcharge programs can be confused with cash discounts, however, a surcharge is not a discount to your customers. Instead, a surcharge passes the buck from you to your customers, saving you money in processing fees.

Types of Credit Card Processing Equipment

payment processing

So what are your equipment options for processing credit card transactions? You connect to your payment processor through relevant credit card machines, so it’s an important consideration.

Your choice of equipment will depend on a few factors. Firstly, what your payment processor supports. Secondly, your needs as a business (are you operating in person or online? Do you need to take your equipment to your customer, or do they come to a register? Do you have other needs like inventory management? etc.). Finally, you should consider the cost of the solution and future mobility (i.e., how much the solution will cost you in the long run).

POS Systems

credit card payment processing

Point of Sale software systems (or POS solutions) are the gold standard in restaurants and retail locations. They handle credit card payment processing as a small part of their function. They can also help manage inventory and coordinate between the front and back of the house. Not to mention, they’re perfect for collecting customer information for long-term retention. They come in many forms, so make sure to dig into your research on a POS system before purchasing. This will ensure it has all the features you need to run and scale your business. 

Virtual Terminals

Virtual terminals are credit card payment processing software that run completely online. Because of this, you can access them by logging into a secure portal (or online payment interface) from any internet-connected device. A virtual terminal allows you to quickly process single (as well as recurring ) credit card transaction(s) directly through your portal. You are the one in control of entering the card data. This is most common with mail order, telephone order (MOTO) businesses.

Payment Gateway

This is often confused with a virtual terminal because they’re often incorrectly used interchangeably, but there are many key differences between virtual terminals and payment gateways.

A payment gateway provider such as attaches the technology that captures and sends transaction data from the customer to the acquirer to an online checkout page on a website. It verifies that the payment is not fraudulent and can even handle recurring billing, chargeback reduction, and PCI compliance.

Mobile/Wireless Terminals

credit card processing terminal

Mobile or wireless terminals have become increasingly popular in retail environments due to their ease-of-use and portability.  Mobile is often used interchangeably to describe the app-based process where your smartphone becomes the terminal. To access, you log into an account from your device within an app. It connects you to your processor to process transactions. These transactions have two options. You can either manually key them into the app or swipe/tap/dip them through physical hardware attached to your smartphone.  

A wireless terminal is similar to a countertop terminal (the traditional credit card processing machine you’ll still see on countertops), yet they are wireless and don’t require any cords. Wireless terminals operate via a rechargeable battery, so charging is easy. Secondly, they connect to the Internet through either WiFi or a 3G/4G subscription to process transactions. This process is similar to a traditional countertop terminal.


EMV is a credit or debit card with an embedded security chip. This technology replaced the magnetic stripe on the back of cards as a more secure alternative. Moreover, to reduce storing direct information on your device, EMV tokenizes (or encrypts) customers’ card data. Make sure to employ best practices when storing credit card information.

An EMV Terminal is a traditional countertop terminal (or credit card machine) that processes payments utilizing that chip. 

Online Shopping Carts

credit card payment processing

If you have or plan to build an eCommerce store, you’ll need an online shopping cart to make it run. An online shopping cart utilizes a virtual terminal on the backend to create a front-end store your customers can use to buy items. Because of this, it allows your customers to make purchases without your direct involvement.

What to Look for in a Payment Processor

You should now be familiar with all the things that factor into deciding to accept credit card payments for your business. Next, let’s talk about how to find the right partner for your business. Choosing from the multitude of credit card processing companies is one of the most important choices you’ll make in growing your business.

While cost is important, it’s equally crucial to consider a credit card processing company. Consider who picks up the phone when you call with an issue and is compatible with your business and equipment needs. And most importantly, focuses on keeping your business transactions secure.

Merchant Services

Your credit card processor is your merchant services provider. Accordingly, merchant services is a term that encompasses a wide range of business financial services. The most common of which is credit card processing.

It may also, depending on your business, include things like ACH (automated clearing house) transactions or electronic checks. Not to mention physical check processing, gift card, loyalty programs, etc.

Additional Services

Along with the merchant services offered by a credit card processor, there are more services they may offer. These include things like:

  • Cash advances or loansinventory for credit card processing
  • Payroll management
  • Inventory management
  • Accounting and invoicing services
  • Customer loyalty programs 
  • Fraud prevention tools


Many payment processors offer integrations with other service providers. Further, this ensures you have the most comprehensive solutions available to you. If there’s a service you need that your credit card processor doesn’t offer, check with them for any relevant integrations that they have available. Not to mention, this is essential for tech-savvy credit card processing.

PCI Compliance

PCI Compliance (also known as PCI DSS compliance) is adherence to a set of comprehensive security standards set by the PCI Security Standards Council. They aim to reduce fraud and related costs for businesses around the globe utilizing credit card processing. Failing to meet these standards may come with exorbitant costs, so this is an important one. 

You’ll want a credit card payment processor that is both compliant with these standards themselves as well as willing/able to help you certify your compliance. 

Fraud and Risk Protection

Accepting credit cards does come with a set of risks that you need to consider. For example, a transaction completed fraudulently at your store without your due diligence is a risk. One that may result in your loss of both the merchandise/service and the money rendered for it. This is because cardholders have protection from fraud.

The true cardholder can dispute transactions with their bank and issue a chargeback  Indeed, this process is essentially a mini court case against the transaction. Your business practices and the industry you operate in impact your rate of chargebacks. Industries or businesses that are considered high risk are more affected by chargebacks and fraud.

Having a merchant services provider who is looking out for your best interest is key. It will also help reduce your risks of fraud and chargebacks while doing business. It will save you time and money in the long run with credit card processing.

Responsive Customer Support

No solution is perfect. Sometimes the power goes out, your terminal malfunctions or a point-of-sale system unexpectedly goes offline. Finding a payment processor that has responsive customer support when you need them will make all the difference.

Credit Card Processing: Closing Thoughts

Credit card payment processing is a complex and confusing industry. Therefore, I hope you feel empowered to sort through credit card processing companies to find the right partner for your business and understand it a bit better after reading through this complete guide to credit card processing.

Contact our team at PaymentCloud to discuss your business needs. In fact, we just might be the right solution for your business’ credit card payment processing needs.